What happens now, Part Two

As I continue to sort my way through the debate over financial bailout legislation, I am assisted by two papers from the Heritage Foundation. The first, by David John, argues in favor of (1) strict oversight over all the new RTC’s activities, (2) allowing the new RTC to exercise rights over purchased securities, as opposed to being a passive holder of them, (3) allowing it to hold the assets without “sunset,” so as to maximize the ability of taxpayers to receive full value for them, and (4) a limit on total taxpayer exposure. It is my understanding that the Treasury Department’s proposal contains all of these features.

On the other hand, the Treasury draft lacks the two features that John considers important. First, the new RTC should be allowed to refer cases to the Justice Department for civil suits to recover bonuses or termination compensation received by executives where appropriate. Second, the new RTC “should purchase securities only at a deep discount, where the market for the security is having difficulty clearing” in order to “exact a cost on the asset holder and ensure that only dysfunctional markets are eligible.”

John also argues, sensibly, that “the new RTC should focus on restoring the markets, not on providing funding for other programs or serving as a platform for other goals.” Unfortunately, but not surpisingly, the draft Senate legislation, which House Financial Services Chairman Barney Frank has already endorsed, includes a number of these bad ideas. John identifies them.

The second piece, by Stuart M. Butler, Alison Acosta Fraser, and James Gattuso, argues that the bailout is justified as one of those “rare situations in which a wave of bad decisions in one sector has such dire consequences for the most basic operations of the economy that other sectors are threatened, jeopardizing the functioning of the entire economy.” At the same time the authors insist that the actions taken in reponse “do not reward investors who should suffer the consequences of their decisions, create incentives for other investors to speculate against the taxpayer, or needlessly widen the intrusive reach of the government.”

To reconcile these principles, the authors set forth a series of rules/guidelines. They include: do not prop up failed or failing institutions; do not try to support prices; do not allow the government to become the permanent “owner of last resort;” and strictly limit legislation to the immediate need to stabilize the financial situation.

Unfortunately, I doubt that we can expect from this Congress the kind of restraint called for in these two pieces. And I doubt that the president, whose original proposal was not terribly restrained, will serve as much of a brake.

To comment on this post, go here.


Books to read from Power Line